Issues in Nevada Deed in Lieu of Foreclosure Transactions

Posted by: on Fri, Aug 31, 2012

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One of the more common forms of real property transactions that the real estate lawyers at Albright, Stoddard, Warnick & Albright are regularly engaged to handle are so-called “deed in lieu of foreclosure” transactions or, for shorthand, “deed in lieu” transactions. In a deed in lieu transaction, a lender receives a deed to property from an underwater borrower, saving the time and expense of foreclosure, in exchange for releasing the borrower from liability on the loan.

Whether you are an underwater borrower or a lender, these transactions require the careful guidance of an experienced real estate transaction attorney who understands these matters. One of the most important elements of these transactions is the release of borrower liability – this is true for both the borrower and the lender. Often the lender is asked to simply cancel the note and reconvey the deed of trust encumbering the real property. The more advantageous approach for such a lender, however, is to not extinguish the underlying loan with the borrower, but, instead, to provide the borrower with a covenant not to sue on the underlying debt. Why does this matter?

To a borrower, if the transaction is handled correctly with appropriate review by legal counsel, the covenant not to sue should provide adequate protection about the concern of liability for the amounts due under the loan – i.e., the entire reason the borrower agrees to go along with the transaction and afford this simplified process to the lender.

To the lender, however, the consequences can be much greater. Recall that the foreclosure process has the effect of wiping out junior liens against the property – this sanitizing effect is not effected through the deed in lieu process. As a result, while a lender will always want to carefully scrutinize the status of title to any property on which it is receiving a deed in lieu of foreclosure, the fact is that it will want to also preserve the effect of its senior deed of trust in case it needs to subsequently foreclose that deed of trust to wipe out a lien it had not discovered before accepting the deed in lieu. If the lender has cancelled the note with its underwater borrower, that fact may well open up the possibility of attack on a later effort by the senior lender to foreclose its deed of trust by junior lienholders who do not want to be wiped out.

For these reasons, a lender cannot be too careful about preserving the integrity of its deed of trust when accepting a deed in lieu. This will mean taking several precautions that a Nevada real estate attorney can provide guidance about, such as including anti-merger language in the recorded deed, as well as in an important estoppel affidavit to be signed by the borrower in these transactions. These considerations, as well as concerns about properly conveying title and dealing with liability issues unrelated to the debt, require insight and advice from an experienced Nevada real estate attorney.

About the Authors: The law firm of Albright, Stoddard, Warnick & Albright is an A-V Rated Nevada-based full-service law firm having attorneys licensed in Nevada, California and Utah. Our firm’s practice includes a strong emphasis on real property law, including advising lenders and borrowers in all forms of secured loan transactions in the jurisdictions where we are licensed.

Note: This article, and any other information you obtain at this website, is not offered as legal advice, nor should it be relied upon as such, nor is it a solicitation for legal services. Only a licensed attorney can advise you with respect to your specific legal needs. We welcome your contacting our firm to discuss such representation. Contacting us does not create an attorney-client relationship. Please do not send any confidential information to us until such time as an attorney-client relationship has been established.

About the Authors: The law firm of Albright, Stoddard, Warnick & Albright is an A-V Rated Nevada-based full-service law firm having attorneys licensed in Nevada, California and Utah. Our firm’s practice includes a strong emphasis on personal injury accidents. Call us at 702-384-7111.

Note: This article, and any other information you obtain at this website, is not offered as legal advice, nor should it be relied upon as such, nor is it a solicitation for legal services. Only a licensed attorney can advise you with respect to your specific legal needs. We welcome your contacting our firm to discuss such representation. Contacting us does not create an attorney-client relationship. Please do not send any confidential information to us until such time as an attorney-client relationship has been established.